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Cash Reserve Ratio (CRR): meaning, purpose and example
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The cash reserve ratio (CRR) is the percentage of a bank's net demand and time liabilities (NDTL) that it must keep as cash with the RBI. The RBI pays no interest on it, and the bank cannot lend it. NDTL means roughly the deposits and other liabilities a bank owes the public, after netting out its dealings with other banks.
The legal basis
Section 42(1) of the RBI Act, 1934 lets the RBI prescribe the ratio for scheduled banks. The old statutory range of 3% to 15% was removed in 2006, so the RBI can now set any figure it considers right. Banks must maintain it on an average over a fortnight, with a minimum daily balance.
Why it exists
- Control of money supply. A higher CRR leaves banks with less to lend, so credit and money supply shrink. A lower CRR releases funds.
- Safety net. Some cash is always available at the RBI to meet withdrawals.
Worked example (illustrative ratio)
A bank has NDTL of ₹10,000 crore. At an illustrative CRR of 4%, it must keep ₹400 crore with the RBI. If the RBI raises the ratio to 4.5%, the requirement becomes ₹450 crore, and ₹50 crore that could have been lent is locked up.
The RBI also used a temporary incremental CRR in 2023, applied only to the growth in deposits over a specified period, to absorb surplus liquidity. It was withdrawn in phases by October 2023.
How bank exams ask about it
Typical stems: "banks keep a percentage of deposits with the RBI in cash is called", "an increase in CRR will", and "which of these does not earn interest". Statement-type questions pair it with the statutory liquidity ratio to test which one is held with the RBI (CRR) and which one stays with the bank (SLR). Learn it alongside the other instruments in banking awareness.
Where to find the current ratio
The CRR is announced in the policy statement and listed in the RBI's key rates table at rbi.org.in. Always take it from there, not from a prep note that may be a year old.
Frequently asked questions
Does a bank earn interest on its CRR balance?
No. It sits in a current account with the RBI and earns nothing, which is why changes in CRR also affect a bank's profit.
What is the difference between CRR and repo?
CRR is a compulsory reserve requirement. The repo rate is the price at which banks can borrow from the RBI. One limits how much banks can lend; the other changes how much it costs them.
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- Statutory liquidity ratioSLR is the share of deposits that banks must hold in cash, gold or government securities before lending. Meaning, legal basis, example and exam angles.
- Repo rateRepo rate is the rate at which the RBI lends short-term money to banks against government securities. How it works, what a change does and how exams ask it.
- Open market operationsOpen market operations are the RBI buying or selling government securities to add or drain cash. Meaning, OMO vs LAF, Operation Twist and exam facts.
- Bank rateBank rate is the RBI's standard rate for rediscounting bills and the penalty benchmark for CRR and SLR shortfalls. Meaning, uses and how it differs from repo.
- Liquidity adjustment facilityThe liquidity adjustment facility is the RBI's daily window for injecting or absorbing cash. Meaning, repo, SDF and MSF corridor, history and exam questions.
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